Jeremy Glaser: For Morningstar, I am Jeremy Glaser. As we get ready for the Berkshire Hathaway Annual Meeting on Saturday, May 5, I'm here with Gregg Warren. He is the senior equity analyst, and we are going to take a look at whether Berkshire's investment opportunity set is shrinking.

Gregg, thanks for joining me.

Gregg Warren: Thank you for having me.

Glaser: So, let's talk a little bit about some of the investments that Berkshire has made in recent history. Particularly during the financial downturn, the firm made a lot of opportunistic investments. Can you talk a little bit about what those investments were and how they played out for Berkshire?

Warren: Well, if we're thinking about the most recent downturn, which is the back half of last year, Berkshire came into the third quarter with about $48 billion in cash. The firm really only had commitments for about $9 billion of that going to the Lubrizol acquisition. So, Berkshire had plenty of cash to work with when the markets tanked.

As you would assume, Warren Buffett and his lieutenants, Todd Combs and Ted Weschler, who had joined in the third quarter, as well, were actively out there looking at investments. One of the more interesting ones was the Bank of America purchase, where Buffett picked up 50,000 shares, 6% preferreds, and Bank of America for $5 billion.

As part of the transaction, he also got warrants to purchase 700 million shares of common stock at $7.14 a share. And if you just look at where the stock is trading right now, a little bit above $8, Buffett has already made $700 million on that investment alone.

One of the other bigger deals during the period was International Business Machines. Buffett had been building up a stake through the course of year but didn't really acknowledge it until after the third quarter. But he put about $11 billion to work in IBM. It's now Berkshire's second-largest stockholding overall and sort of speaks volumes to Buffett's ability to dip into the cash on hand and buy up securities.

Glaser: Certainly, we've seen that Buffett really has made a name for himself by buying on these dips and putting money to work when there's fear in the market, but how about his new lieutenants? Were they also able to take advantage of this downturn?

Warren: I think one of the more interesting deals that we saw during the period was Berkshire buying up about $1 billion worth of DirecTV. It's a fairly large stake for either Todd Combs or Ted Weschler to be building up. Based on what we've seen in the past with Lou Simpson or someone Buffett considers to have ideas that are not necessarily his--Buffett tends to do the billion-dollar-plus sort of transactions--I think what this deal does sort of signal is the confidence that he has on these two guys if he is willing to let them build up that big of a stake overall.

Glaser: So, it sounds like everyone at Berkshire is really out there putting money to work. But because the market has run up pretty considerably, there's a lot less opportunity from evaluation standpoint. Are they, basically, just having to sit on their hands? Is there anything Berkshire can do in a market like this?

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Warren: Well, I think you are absolutely right. I think with the markets running up as rapidly as they've had off the third-quarter lows, I would be surprised, if in the first quarter, we saw much buying activity by either Buffett, Combs, or Weschler.

I think one of the other interesting transactions that took place in the third quarter that we didn't mention was that Buffett was actually out there buying Berkshire stock. He picked up about $67 million worth of shares there, and that's always sort of an opportunity set that's out there for the firm. But I think the limitations that he has placed on Berkshire's ability to buy back stock, which is no more than 1.1 times book value, means that that window when he was buying closed relatively quickly, and right now with the stock trading about 1.2 times book value, it's difficult to see him stepping in and buying back shares.

As far as other investment opportunities go, though the markets might not be providing much right now, Berkshire is definitely still seen as a buyer of choice for a lot of firms, especially those that aren't interested in being integrated into another organization or don't necessarily want to get on the path of the leveraged buyout with a private equity firm.

I think in the meantime, Buffett definitely has opportunities within Berkshire, especially within say Burlington Northern and MidAmerican Energy to put money to work because these are capital-intensive businesses, and with the incremental investments that they are making, they are earnings decent returns on.

I think also internally, you've seen situations where investments like MidAmerican or Lubrizol have resulted in additional deals, like last year. Berkshire stepped in and picked up two solar panel production deals; they are going to invest about $3 billion in overall. And then Lubrizol saw about $0.5 billion worth of plug-on acquisitions last year. So, there's definitely opportunities out there, it's just not as obvious as you would normally see.

Glaser: So, you've laid out a few options, but is there really enough there for Berkshire to put just this incredible amount of money to work?

Warren: I think the key with Berkshire is that there's always going to be options; it's just not whether or not they are good options. Our biggest concern with Berkshire has always been the firm's ability to continue to put money to work in a meaningful way. The larger the firm gets, the harder it's going to get for the firm to find deals that are not only meaningful but that offer the sort of returns that they've been able to generate in the past. So, again, the options are there, it's just whether or not they are going to be lucrative enough.

Glaser: Then finally, what's next for Berkshire? How is the firm going to manage this?

Warren: I think as long as Warren Buffett continues to run this show, Berkshire is just going to continue to do what it's done. The successful business model that he has created during the last 45 years is his testament to his abilities. I think he's definitely got the knowhow and the connections to continue to find deals. So, I think in the meantime, it's just a matter of more the same for Berkshire.

Glaser: Gregg, thanks for your thoughts today, we are looking forward to hearing your take on the meeting.

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